What Are Liquidated Damages in a California Residential Purchase Agreement?

What Are Liquidated Damages in a California Residential Purchase Agreement?

The California Residential Purchase Agreement is an ever-evolving document central to purchasing residential real estate in the state of California. In addition to a plethora of additional disclosures, the purchase agreement is the mechanism for submitting an offer on a San Mateo County home for sale. The document details the terms of the offer and then becomes the basis of escrow instructions. Within the purchase agreement is an important clause called liquidated damages. Both buyer and seller have the option to initial this clause, and it is only in effect if both parties do so.

When you write an offer on a San Mateo County home for sale, you will have many documents to sign. Many of them are boiler-plate and rather straight forward, addressing issues that have resulted in past litigation. The 16-page Residential Purchase Agreement has its fair share of legalese, but it also has many important clauses that a buyer should understand prior to signing. Because of its importance, your San Mateo County Realtor should walk you through this document in detail.

What are Liquidated Damages?

According to the California Association of Realtors, “A liquidated damages provision is an agreement in advance that in the event the buyer breaches contract, the buyer will owe a specified amount of money.” The liquidated damages section of the Residential Purchase Agreement (see image below) can be a bit confusing, yet your San Mateo County Realtor is not the right person to advise you about whether you should initial it or not, because they are not legal experts. They should explain it and provide you with as much outside information as is needed to ensure you understand the clause.

How Much are Liquidated Damages?

According to the Residential Purchase Agreement, “If Buyer fails to complete this purchase because of Buyer's default, Seller shall retain, as liquidated damages, the deposit actually paid.” It also states that, “The amount retained shall be no more than 3% of the purchase price.” So, the maximum amount a seller would receive if a buyer pulled out of a contract after all contingencies are removed would be $30,000 on a $1,000,000 purchase. If the buyer only put in $10,000 as a deposit, then the seller would only receive $10,000 in damages. 

Advantages of Initialing the Liquidated Damages Clause

The California Association of Realtors clearly outlines the benefits for both the buyer and seller of initialing the Liquidated Damages clause. For both buyer and seller, the main advantage is certainty. Both parties know in advance the maximum amount of money that the seller would receive and the buyer would give up in the case of breach of contract. With the liquidated damages provision in place, the seller need only show that the buyer was in breach of contract. Without a liquidated damages provision in place, there is no automatic presumption that the seller is entitled to the deposit amount. Without the provision, the seller would be required to go to court and prove damages, which can be complicated and costly.

In Summary

Liquidated damages is a complicated topic, and there are many nuances not discussed in the explanation above. Anyone writing an offer on San Mateo County real estate should do their own research, and if needed, consult with an attorney.

Veritas Homes is a boutique residential real estate brokerage servicing home buyers and sellers on the San Francisco Mid Peninsula. Founded by Val Vandervort, Veritas Homes (Latin for “Truth”) is committed to providing outstanding customer service to all and operate with “Truth” at the center of all we do. To learn more about the San Mateo Real Estate Market, read "Is the Mid Peninsula Real Estate Market Bouncing Back?". To learn about a great waterfront home for sale in San Mateo, read "Resort Style Living on the San Mateo Lagoon." To read about great opportunities for first time home buyers in San Mateo, read "First Time Homes Buyers: The Village San Mateo vs Sunnybrae San Mateo."


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